China and the World of Business • China Business and the World

Month: December 2016

Even if LeEco and the rest of Jia Yueting‘s business holdings implode over the next few weeks, those of us who will pick through the wreckage looking for the lessons will surely learn two things very quickly.

The first thing that we will discover will be that anyone who dismisses Jia as a “fool” or an “idiot” will be wrong. Under the bluster, we will find that Jia is an exceptionally smart guy who had a fantastic vision for his company.

The second thing we will find is that the reason for Jia’s failure was not his overall strategy. Let me explain that a bit.

Jia is an implicit subscriber to an ethos that is common among entrepreneurs that I call “conglomeration mystique.” Seeing himself as cut from the same cloth as Elon Musk, Steve Jobs, and Jeff Bezos, Jia sees no reason why he cannot do what they did.

All things being equal, he’s right. Other entrepreneurs, supported by a war chest from a core cash-cow business, have leapt into unrelated fields and surprised their critics. I know of no gift possessed by those people that Mr. Jia might have lacked. So the vision was not wrong.

Jia’s mistake is one that has plagued so many Chinese entrepreneurs: operating in a market that rewards speed and short-termism, he became convinced that he had to do everything right now, or the opportunity would be lost to him.

As the Bloomberg article hints, Jia’s pace of execution outstripped his ability to build the capital to support it. At several points, he likely had the choice to slow down and let the capital catch up. Instead, he chose to risk overextension, to gamble on things working out just right, and in so doing proved Gordon Sullivan’s maxim that “hope is not a method.”

The question this leaves is thus: how do you get an entrepreneur, forged in China’s Make-It-Today-For-Tomorrow-The-Government-Will-Change-the-Rules business environment, to eschew the very thinking that made him money in the first place? I don’t think you can, which means that the kind of grand-scale Hail Mary approach that has tripped LeEco is likely to become a fixture on the China business scene in the coming years.

For some, it will work. And LeEco is down, but it is not out, yet.

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In all of the discussion lately about Uber in China, one topic that is not getting a lot of airplay is the way in which the outcome for Uber is being positioned. One person for whom I have a great deal of respect believes that Uber did great, that they wound up with exactly what they wanted in the first place, and that overall the outcome – as junior partner to Didi Chuxing in a combined business – is a victory for Uber.

As I mentioned in an earlier post, to me that seems a bit like spin. First, it is highly unlikely that this is the outcome Uber sought all along. Had it sought a minority stake in Didi, it could have (as Apple did recently) simply written a check, swapped stock, and agreed to work together globally. And it could have been done more quickly, easily, and with less of a drain on company attention and coffers.

Second, all that their efforts won them is a weak role in Didi, just another seat at the table with a group of powerful investors to whom Uber is a very small potato. Had they gone in with an offer early, they may well have saved everyone money and saved Didi from the need to turn to outside investors. Uber may well have ended up with a less diluted position.

Third, they sit with no better odds of a payoff now than before. Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.

Finally, with its new A-List of global investors, Didi may well prove to be a more formidable rival outside of China in the long term than it might have been otherwise, especially if Uber had shown up at the beginning offering a strategic tie-up. Now Didi has international ambitions, and with an 85% market share at home in a much bigger market, will be in a better position to face Uber in other markets.

So did Uber win? Events will tell us, but probably not for some time. And that’s about the most you can say. From a removed perspective today, Uber is salvaging the most it can from a shipwreck, and pretending that it intended to be on the rocks all along won’t do much for the company’s credibility with the Street.

Conglomeration Mystique – concept – a business ethos with two components.

First, the conviction on the part of a successful entrepreneur or company that a) because it is successful in one field it can be successful in any field to which it applies its brand or capital, and b) that to be a truly great company a firm must be in a diverse range of businesses rather than focus on a single field, all regardless of actual market conditions. Entrepreneurs with this ethos frequently cite examples like Elon Musk, Jeff Bezos, and Steve Jobs as proof of the concept.

The second component is the compulsion, usually the result of the above, to build a conglomerate business, either via acquisition or startups, and usually accompanied by rapid geographic expansion.

Related condition: gigantism

If you believe the writings of Tom Peters – whose thinking informed a lot of my early business career – the conglomerate is a really dumb idea. Peters was not necessarily wrong. During the economic boom following World War II, Corporate America decided that the best, easiest path to growth was acquiring profitable companies with stock, excess cash, and cheap debt.

The decade 1973-1983 threw a sequence of challenges at US businesses that exposed the weaknesses of these companies. The end of cheap energy, the conclusion of the Vietnam War, the end of the Gold Standard, the rise of Japanese and German companies, the emergence of corporate raiders, and the growing disruption of technology all landed on US companies in rapid succession. The conglomerates were the largest and most unwieldy of America’s corporate dinosaurs, and they crumbled: Fansteel, ITT, LTV, Olin, Teledyne, Esmark, Litton, Continental Group, and Sperry were all conglomerates in the Fortune 100 in 1970, and are today either gone or are leftovers of their former selves.

The verdict – and now the accepted wisdom, at least outside of China – is that specialization and focus pay. While a degree of strategic diversification might be good, lumping radically disparate businesses together under a single roof creates more management problems than it solves.

Donning my historian’s hat, I think the verdict is more qualified. During times of rapid economic growth and boom, using cash-cow businesses to fund expansion and acquisition into other promising markets is a viable strategy. And there are exceptions. GE has used a long sequence of acquisitions and spinoffs to keep it a going concern, swinging from industry-to-industry like Tarzan swinging on vines through a jungle. And call it what you will, Warren Buffet’s Berkshire-Hathaway is aught more than a very well managed conglomerate, drawing free cash-flow from insurance operations to fund its growth elsewhere.

So conglomerates can work under some very specific circumstances. Where Peters’ research still stands, though, is that corporate conglomeration is not a viable default strategy, especially when it is used as a substitute for an imaginative strategy.

When any company in China – whether a large state-owned enterprise or an entrepreneurial operation like LeEco – appears to be turning itself into a diversified holding company, the burden of proof rests on the company to demonstrate that there is some really smart thinking behind the activity, and that it is not simply hiding strategic failure.

For two years, Jean Liu and Travis Kalanick were mortal adversaries, as their businesses, the world’s two largest ride-sharing companies, fought an increasingly bitter and expensive war. Kalanick, CEO of Uber, the San Francisco-based ride-hailing app, was trying to muscle into China, where Liu is president of Didi Chuxing, Uber’s Chinese equivalent.

Charles Clover at the FT offers this dramatic lede for an article that lays the credit for Uber’s defeat in China at the feet of Didi Chuxing’s Jean Liu.

Ms. Liu and her team at Didi deserve much credit for their victory in China’s shared-ride wars. All of us wish them only the best as they take on what will undoubtedly prove to be the far more formidable adversary: a Chinese government decidedly uncomfortable with leaving in the hands of a privately-owned company an increasingly essential piece of the nation’s transportation infrastructure.

But an honest assessment of the battle must conclude that Ms. Liu was helped at many turns by a series of unforced errors on Uber’s part. I won’t go into them here – take a look at my interview with Jeremy Goldkorn at SupChina, where I lay out Uber’s four most fundamental mistakes in China.

In addition, let’s also remember a few things:

Didi’s financial backers gave the company the war chest it needed to fight a street battle of attrition against one of the planet’s best funded unicorns.

Ms. Liu’s boss, Didi Chairman Cheng Wei, was hardly a figure head in this battle. Not for nothing did Forbes Asia name him 2016 Businessman of the Year.

Didi came to the battle fighting on familiar, home ground, and was in substantial possession of the field already when Uber showed up. Uber was battling an entrenched player as an interloping underdog in a market increasingly unfriendly to outsiders. Uber’s rhetoric and war-chest aside, they were the weaker player.

It was not “Jean vs. Travis.” It was Jean vs. the Uber China team, and as time goes on it will become more clear that Travis and his team were relatively hands-off, allowing the local team to run things. Didi defeated Travis’s partner’s team.

Regulatory changes in the market played a significant role in the driving Uber’s surrender. Unless Didi orchestrated those (not impossible), the government was also a player in the game. And if Didi did orchestrate those, protectionism beat Uber as much as Didi’s executive team.

To the victor goeth the spoils, and Ms. Liu is clearly a capable executive whose career is now pointed toward even bigger and better things. But there is nothing learned by pretending that this was not a far more complex battle than the FT seeks to portray as it graces Ms. Liu with the laurels.

One more interesting point from the article. Ms. Liu and Didi continue to play the outcome as a “win-win” for Didi and Uber. I’ve spent a career in PR in China, and to me that messaging carries a very heavy whiff of spin. I’ll explain why in a later post.